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Traditional Capital Budgeting Models

Traditional Capital Budgeting Models

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HK Mahmud
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20 views1 page

Traditional Capital Budgeting Models

Traditional Capital Budgeting Models

Uploaded by

HK Mahmud
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Traditional Capital Budgeting Models

Capital Budgeting Models are one of the several techniques used to measure the
value of investing in long term capital investment projects. The process of analyzing
and selecting various proposal for capital expenditure is called capital budgeting.
Firms invest in capital projects to expand production to reduce anticipated demand
or to modernize production equipment to reduce cost. Firms also invest in capital
projects for many non-economic reasons such as installing pollution control
equipment, converting to a human resource database to meet government
regulations, or satisfying non-market public demands. IS are considered long term
capital investment projects.
Six capital budgeting methods are used to evaluate capital projects. They are:-
- The pay back method.
- The accounting rate of return on investment (ROI).
- The cost benefit ratio.
- The profitability index.
- The internet rate of return (IRR).
- The net present value.

All capital budgeting methods rely on measures of cash flow into and out of the
firm.
Tangible Benefits
Tangible benefits can be quantified and assigned a monitory value.
Intangible benefits such as more efficient customer service or enhance decision
making cannot be immediately quantified but may lead to be quantifiable gains in
the long run is called intangible benefits.

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